NDLI: Constrained Mean-Variance Portfolio Optimization with Alternative Return Estimation

Content Provider	Springer Nature Link
Author	Georgiev, Boris
Copyright Year	2014
Abstract	This paper studies the problem of asset allocation in a mean-variance framework. The theoretical model of portfolio optimization is specified and then applied to a long panel data set from historic to most recent times, March 1990 – March 2013. The paper contributes in three ways. First, an alternative asset return model is proposed that combines the historical returns, capital asset pricing model (CAPM) and returns estimated based on firm fundamentals. These return estimates enter the optimization problem. The second contribution is the application of an improved covariance matrix estimator that has superior properties compared to the typical sample covariance estimator. Third, the paper proposes two investments strategies. The first proposition suggests always choosing the maximized Sharpe ratio portfolio and the second one, the portfolio with the highest information ratio. The nature of both strategies is designed for investors with different appetites for risk. The performance of these choices is analyzed in light of four types of constraints: upper/lower investment limits, group constraints and transaction costs. The one-period optimal investment portfolio is rebalanced at quarterly intervals. Both strategies are benchmarked against an alternative investment choice such as holding the S&P 500 index, or investing in a risk-free asset such as a bond. Portfolio analysis and backtesting reveal that the strategies are superior to simply holding an equally weighted portfolio, a risk-free asset or the S&P 500 index.
Starting Page	91
Ending Page	107
Page Count	17
File Format	PDF
ISSN	01974254
Journal	Atlantic Economic Journal
Volume Number	42
Issue Number	1
e-ISSN	15739678
Language	English
Publisher	Springer US
Publisher Date	2014-01-04
Publisher Place	Boston
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Portfolio Choice; Investment Decisions Financial Forecasting and Simulation Mean-variance optimization Asset allocation Investment decision Finance Economics general Macroeconomics/Monetary Economics Microeconomics International Economics Public Finance & Economics
Content Type	Text
Resource Type	Article
Subject	Economics, Econometrics and Finance

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4	Project PI / Joint PI	Principal Investigator and Joint Principal Investigators of the project	Dr. B. Sutradhar bsutra@ndl.gov.in Prof. Saswat Chakrabarti will be added soon
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